Tencent delivered solid 4Q19 results, with revenue/adj. net profit +22% YoY/+29% YoY, +2%/-1% compared to consensus. We are bullish on its game momentum with globalization and positive COVID-19 impact, and expect social ads to offset soft media ads. 1Q20E could be another solid quarter, and we suggest keeping eyes on upcoming DNF Mobile and LOL Mobile. We slightly adjusted its EPS by 0%/-3% in FY20/21E, and revised our TP to HK$440. Suggest to buy on dips under market volatility.
- Solid 4Q19. 4Q19 revenue was RMB105.8bn, up 22% YoY, 2% above consensus, mainly on strong games, social ads and Fintech business. Non-GAAP net profit grew 29% YoY, largely in line with consensus. We view this result as positive, for its game acceleration and better-than-feared ads.
- Game accelerated, moving to 1Q20E strong momentum. Tencent categorized games by markets from 4Q19. Game +25% YoY in 4Q19 (vs. +11% in 3Q19), in which international games revenue more than doubled YoY, contributing 23% of online games. We expect strong game momentum to continue in 1Q20E, mainly driven by: 1) positive COVID-19 impact on games for higher MAU & time spent; 2) key titles (e.g. HoK, PUBG Mobile) performed well in both domestic market and overseas; 3) overseas contribution with Supercell’s consolidation; and 4) new game titles (e.g. DNF Mobile and LOL Mobile) to bring further upside. Noted that deferred revenue +38% YoY, suggesting strong games outlook.
- Social ads acceleration to offset soft media ads. 4Q19 ads +19% YoY (vs. 13% YoY in 3Q19), with social ads/media ads +37% YoY/-24% YoY (vs. our estimate of +32%/-21% YoY). Despite macro headwinds and ads challenges from offline business & SME under COVID-19, we expect its social ads resilient in FY20E, driven by 4th Wechat momentum ads rollout and solid ads from game & online education advertisers. With continuously share gain, we forecast its ads to grow 18% YoY in FY20E.
- Maintain BUY. We slightly adjusted its EPS by 0%/-3% in FY20/21E, but revised our TP to HK$440, by rolling over to FY21E multiple. Our new TP is equivalent to 33x/28x FY20/21E P/E. Tencent could be more defensive under COVID-19 impact, and we suggest investors to look ahead to its 1Q20E performance, with continuously mobile games acceleration and solid social ads. Maintain BUY.
